Muted start for Europe as health concerns linger, oil tumbles again

21-5-2020 10:24:2421-5-2020 10:12:46Stock markets in Europe and the US finished sharply lower on Friday as the fears about the health crisis weighed on sentiment.

Equities enjoyed decent gains in the middle of the week as the announcement of rescue packages and the optimism surrounding the US stimulus package provided a big boost to market confidence. The lack of an EU-wide coordinated response to the health crisis ended up souring equity sentiment on Friday. Profit taking can’t be ignored too, as some dealers wanted to square up their positions before the weekend. On Friday, the Dow Jones closed down 4.1% even though traders were waiting for President Trump to sign off on the stimulus scheme.

Shortly after close of trading in New York, Mr Trump approved the $2.2 trillion rescue package. The deal will include business loans, increased unemployment benefits and government payments of $1,200 to adults and $500 payments per child. It is the largest stimulus package in US history.

A mega amount of money has been thrown at the problem but the Covid-19 crisis is still raging. Countries like Spain, Italy and the US are still seeing the number of confirmed cases rise. According to data compiled by John Hopkins University, the number of infections in the US is roughly 140,000. Now the US package is out of the way, traders might turn their attention to the medical data.

Overnight, equity markets in the Far East sold-off on health fears. Stocks in Japan and China are in the red. The People’s Bank of China lowered the 7-day reverse repo rate from 2.4% to 2.2% in an effort to assist liquidity in the banking sector. Oil prices declined because of ongoing demand concerns, and Brent crude and WTI fell to their lowest levels since 2002.

The CMC USD index fell to its lowest level since mid-March. The Federal Reserve revealed an open-ended stimulus package at the start of last week, and that sparked the decline in the greenback. The unprecedented move by the central bank sent out a very clear message to the markets that they are willing to do what it takes to tackle the crisis. Jerome Powell, the Fed’s chief, made it clear the bank is not short of ammunition, so traders understood the Fed are in this for the long haul.

The US produced some interesting economic data last week. The jobless claims report rocketed to 3.28 million – a record high as the early impact of the Covid-19 crisis becomes apparent. The colossal reading underlines the seriousness of the situation in terms of the economic ramifications. As terrible as the reading was, the jobs market is probably in more for pain. The economic indicators weren’t all bad as personal consumption and personal income came in at 0.2% and 0.6% respectively. The figures were for February so the March numbers could be a very different picture.

The Bank of Canada (BoC) did a surprise interest rate cut on Friday. The central bank cut rates to 0.25% from 0.75%. In addition to the rate cut, the BoC revealed plans to start a weekly government bond buying scheme of C$5 billion per week. Earlier in the week the jobless claim report surged to nearly 1 million, so the BoC clearly felt their duty was to step up to the plate. The weak oil prices should put extra pressure on Canada’s economy too.

The pound had a good run last week as its fortunes turned around after a few weeks of losses. Sterling gained ground versus the US dollar as well as the euro as bargain hunters stepped into the fold. On Friday, it was reported that Prime Minister Johnson has tested positive for coronavirus, but he will continue to head up the government from a self-isolated position.

Gold lost ground on Friday as profit taking set in, but on the week the metal increased by 9.5% - its biggest weekly gain since 2008. The weakness in the US dollar combined with the closure of refineries in Switzerland helped prop up the asset price. The news out of Switzerland triggered supply woes. Seeing as the Fed are pursuing an extremely loose monetary policy, that could mean that gold will remain popular in the medium-term.

Palladium had a great run last week as the commodity surged in excess of 40% on news of lockdowns in South Africa – which accounts for roughly 35% of the world’s supply. Supply fear sent the metal flying.

It wasn’t all good news for commodities as oil tumbled again. Even though we have seen huge intervention from central banks and governments recently, the oil market pushed lower as dealers are afraid that demand will severely drop off on account of the pandemic. To make matters worse, the Saudi Arabia-Russia price war is hurting the oil market too as the Saudis are keen to push the price lower to get back at Moscow. The slump in oil is hitting the shale industry too, which is concerning the US government.

The UK will post a number of economic indicators this morning. The Nationwide house price index is tipped to show a 0.1% fall on a monthly basis. The report will be released at 7am (UK time). The Bank of England consumer credit report is expected to be £1.1 billion. Mortgage applications and mortgage lending are expected to be 68,200 and £3.95 billion respectively - these reports are due out at 9.30am (UK time).

The preliminary reading of German CPI is tipped to cool to 1.4% from 1.7%, and the reading will be posted at 1pm (UK time).

At 3pm (UK time) the US pending homes sales report will be announced and the consensus estimate is for a 1% fall in February.

EUR/USD – has been pushing higher for over one week, and while it holds above the 50-day moving average at 1.0997, the positive move should continue. 1.1236 might act as resistance. A break below 1.0997 might put 1.0870 on the radar.

GBP/USD – has been driving higher recently and if the bullish move continues it might target the 100-day moving average at 1.2879. Should the currency pair undergo a pullback, it might retest the 1.2000 area.

EUR/GBP – is in a downtrend and further losses might see it target 0.8758 – 200-day moving average. A break above 0.9000 might send it to the 0.9100 area.

USD/JPY – has been pushing lower for nearly one week and while it holds below the 200-day moving average at 108.30, the bearish move should continue. Support might be found at the 106.00 area. A push higher from here could see it retest the 110.00 zone.

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